Breaking news: May 11, 2012 J.P. Morgan CEO Jamie Dimon admitted that the bank had lost $2 billion in bad trades and could face an additional $1 billion trading losses in the second-quarter. * More breaking news: July 13, 2012 "JPMorgan’s chief investment office has lost $5.8 billion on the trades so far, and that figure may grow by $1.7 billion in a worst-case scenario," - Bloomberg. More breaking news: it's finally happening: (as predicted three months ago in article below) JP Morgan is starting to yell that traders hid positions, and will try to put blame on them...see Reuters "Traders May have hidden losses"
From teapot tempest in April to $2 BN loss in May to $5 BN + in July : Dimon still boss
April 8, 2012: A French-born J.P. Morgan Chase & Co. employee named Bruno Michel Iksil has unsettled credit default swap markets with his gigantic bets on the solvability of certain companies.
This now risks becoming a problem as it dawns on market participants that he might have bet wrong. What happens if any of these companies do in fact default?
Before going further, it should be pointed out that any idiot can make money for a while selling CDS. That's one of the reasons they're such trouble makers.
"Profits" on "premiums" to "protect against default" are recorded yearly before anyone knows how the long term bet will turn out. Sellers pocket the payments and announce profits (on which they earn bonuses!). As long as there's no default, all is good. But, when default happens--bam!--the seller must pay out. And then, surprise, catastrophe. On a scale that can bring down a global financial institution, like, for example AIG in 2008. -- Or Deutsche Bank and Goldman had US taxpayers not bailed them out by honoring 100% of AIG's insane commitments. In fact, trouble can start even earlier--once market participants begin to suspect these bets may go bad. That's what's happening now...
How big are the French trader's bets? WSJ says big enough to move the index. It is frankly impossible to imagine that Iksil took these crazily risky positions without permission (even encouragement) from his managers. So why the focus on him?
Is this once again blame-the-Frenchman time?
Finance fans will remember the multi-billion dollar accusations of fraud against Goldman Sachs who sold its clients toxic mortage backed securities that it had specifically designed to fail for the sole and unique purpose of betting against them.
Who got blamed for massive and long term fraud by this financial giant? One man: Fabrice Pierre Tourre. French fall guy.
The Frenchman Tourre was the only person named when financial regulators charged the US investment bank Goldman Sachs with fraud.
And now here comes J.P. Morgan Chase & Co.
Chief Executive James Dimon earns top pay on Wall Street for his role in guiding JP Morgan to profits--$22.4 million for Dimon in 2011 alone. But what if profits derive from ill-considered bets that can wreck the company? (Hedge funds are happily buying the CDS Iksil is selling, betting he's wrong.)
If the past is any guide, the CEO gets to keep the money--and blame the Frenchman!
Though, admittedly there were two significant differences with the Tourre and Iksil cases.
First, Kerviel did everything he could to hide the trades (though one can be excused for wondering how a bank like Socgen could fail to see billions of high risk bets by a so-called "rogue trader" ).
The other difference, of course: in Société Générale, everyone was French.
(For more on J.P. Morgan and the London Whale, see Wall Street Journal article by Gregory Zuckerman and Katy Burne )
These just in:
According to the Forex Pros site, the so-called "London Whale" (baleine de londres) is likely hedging JP Morgan's own bonds". "...it is premature to conclude that JPMorgan has taken a large loss..Most likely they have something on the other side of the trade that the market doesn't see."
* "Whale" Business Insider tells us, is the unflattering nickname given to idiot rich people that drop millions at a casino. "And," reporter Joe Weisenthal adds,
"apparently 'The London Whale' isn't his only nickname. The trader became such a big client of credit-derivatives dealers that some started calling him Voldemort, the Harry Potter book-series villain so powerful he simply was referred to as 'He Who Must Not Be Named,' said one fund manager, who asked not to be identified because his firm does business with JPMorgan. The whole thing, with hedge fund traders using nasty nicknames to describe the guy via the press, seemed odd from the beginning. This only makes it weirder." - Business Insider
According to bygonelondon.com : "Iksil works in London in the bank’s chief investment office, which has assembled traders from across Wall Street to its staff of 400 who help oversee $350 billion in investments. While the firm describes the unit’s main task as hedging risks and investing excess cash, four hedge-fund managers and dealers say the trades are big enough to move indexes and resemble proprietary bets, or wagers made with the bank’s own money."
For more analysis of The London Whale's positions and the debate over the Volker Rule, see bygonelondon.com and, especially, Business Standard, which says some traders estimate that Iksil may have built a position on one index of as much as $100 billion.
"This year, Iksil has been betting on an index of 121 companies that all had investment-grade ratings when the benchmark was created in September 2007, the market participants said. Trading in that index surged 61 percent the past three months, according to data from Depository Trust & Clearing Corp.
The net amount of wagers on the index, which is tied to the creditworthiness of companies such as Wal-Mart Stores Inc. and now-junk-rated bond insurer MBIA Insurance Corp., soared to almost $145 billion at the end of March from $90 billion three months earlier, according to DTCC, which runs a central registry for credit-default swaps and reports weekly aggregate volumes.
"Iksil's trades have been so large that they're widening gaps between the relative value of the indexes and the average price of contracts tied to companies in those indexes, according to the market participants. That has frustrated some hedge funds that had bet the gaps would close, the people said." - Business Standard
* Update May 15, 2012 For readers interested in understanding how JP Morgan lost $2 BN (perhaps more,) see this excellent article in Wall Street Daily by Mathew Weinschenk. (It would appear that JP Morgan bet that the spread between the cost of shorter term and longer term CDS would narrow, but, for various reasons, it didn't work out. Oops.)
* Update May 17, 2012 WSJ article by Gregory Zuckerman (no relation) suggests that JP Morgan CEO Mr. Dimon lies when he claims "the CIO group's intent was to hedge the company's exposures in a difficult credit environment." In fact, earlier winnings from bold bets, whetted appetitefor more, causing management to tolerate high risk in search of gains.
* Update July 13, 2012Bloomberg article by Dawn Kopecki and Michael J. Moore "JPMorgan’s chief investment office has lost $5.8 billion on the trades so far, and that figure may grow by $1.7 billion in a worst-case scenario," WSJ article by Saabira Chaudhuri and Dan Fitzpatrick : "J.P. Morgan said on its conference call Friday that it would recoup, or claw back, two years of compensation from those responsible for the London CIO losses. The Journal reported this week that clawbacks at the bank would target the CIO traders and their former boss, Ina Drew, a longtime top lieutenant of Mr. Dimon who left the bank following the trading-loss disclosure".